Sir, in Illustration 6, why would we invest if the NPV is negative, shouldn't that be considered as zero while multiplying it with the probability of down move? In case if we are assuming that we don't have that option but we are investing today itself and the CFs will be dependent upon govt deciding it one year, shouldn't the cash flow of year 1 to be considered of Rs. 21 lacs?
had the same doubt, resolved that we dont have the option to decide if we should invest or not (call option). Here we have the timing option only, hence we have the option on when to invest. Think of it like we have already committed that we will invest and the supplier has given us to option to either setup the plant today or after 1 year.
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Thank you sir
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Sir, in Illustration 6, why would we invest if the NPV is negative, shouldn't that be considered as zero while multiplying it with the probability of down move?
In case if we are assuming that we don't have that option but we are investing today itself and the CFs will be dependent upon govt deciding it one year, shouldn't the cash flow of year 1 to be considered of Rs. 21 lacs?
had the same doubt, resolved that we dont have the option to decide if we should invest or not (call option). Here we have the timing option only, hence we have the option on when to invest. Think of it like we have already committed that we will invest and the supplier has given us to option to either setup the plant today or after 1 year.
Applicable for may24?
Yes
1 Question is planned for may 2024